#substantial completion

Substantial completion (aka, substantial performance) in real estate is usually defined this way: When approximately 97% of work outlined in a construction contract is done.

This milepost is crucial in this industry for a number of reasons:

a) so, a contractor can get paid out without having absolutely everything done,

b) so, an owner can pull down his or her takeout mortgage (usually much less costly money than a construction loan, where risks are higher and interest rates higher too as a result), and

c) so, the 45-day lien period can begin.

This is well and good for everyone so far except here’s the thing–owners, by this point, are often running low on cash and contractors, having basically cashed-out, lose interest in terms of completing every last little detail and remedying deficiencies.

Guess what?

Details matter. Unfortunately.

It’s the last 3% that tenants, visitors, guests, passersby, buyers, residents, attendees actually see and notice.

Hence, if you don’t:

-install gas fireplaces in your basement apartments to make them seem more homey

-paint that cool trompe l’oeil detail on a feature wall

-upgrade appliances

-add keypad locks

-use a smart t-stat

-put in a backyard storage shed

-add a playland element such as an outdoor ping pong table or pickleball court

-install an all-off switch to cut down on energy use

-recycle stormwater

-add a backyard workshop

-convert a garage into a microsuite or garage office

-name your building (with a plaque, sign or foundation stone)

-landscape the place and install (for example) California shutters or other decent window blinds to improve curb appeal

-create manufactured walkout conditions for your lower level units so they have more light and air

-make sure you have balconies and/or private outdoor patios so residents can get some fresh air

-add backyard homesteading (or at least a raised garden bed)

-build an outdoor kitchen

-create lighting scenes and reduce energy usage via LED installs

and a bazillion other elements, you will find that your buildings and brand will lack sex appeal, and they won’t help you attract the right tenants/users. Plus, the ones you do sign won’t stay as long or pay as much…

The city of Ottawa is famous for not finishing anything.

The city wanted to build a bus transitway–one that ensured buses would have their own ROW (rights of way) and never have to intermix with cars–but in a period of more than 50-years, they never completed it. Then they had another idea–let’s build an LRT (light rail transit). So, they bought ROW to take the O-train from downtown to Barrhaven in the south, and, after buying all the necessary land, acquiring the funding to build the line plus signing a contract with Siemens and PCL to build the line, they cancelled it and got… nothing (except a lawsuit from Siemens and PCL, which was only resolved when the city coughed up tens of millions of dollars in damages).

Worse, private sector developers bought land near the proposed (then cancelled) O-train line to build billions in new (denser) development, which then got tabled too.

Finally, the city did complete a short east-west (instead of north-south) LRT only to find that a) it goes from nowhere to nowhere and b) as the current mayor says, “It’s pretty good–it’s 98% reliable.”

Think about that 98% number. It’d be a terrific result if you or I got 98% on our high school math test. But for major transit system? Not so much.

Say, you have a truck and you make 25 trips with it each week: 5 a day, 5 days a week, then you and your truck rest for 2 days.

In two weeks, you’ve made 50-trips with your truck. If it had a failure rate of 2% like Ottawa’s LRT, it means your truck is breaking down once very two weeks (2% of 50 = 1, right?)

It wouldn’t be very long before you would be getting rid of that truck.

A 2% failure rate for essential infrastructure is a completely unacceptable number IMHO. When I lived in Sydney Australia, I took the bus from Bondi Beach where we lived to Central Station where I caught a train to Chatswood on Sydney’s North Shore. I did that every day for four years (1-hour and 15-minutes each way if I made the connection, longer if I didn’t). In all those years, the number of times the system failed was… 0.

What is a half finished building worth?

It probably has a negative value.

What is a 97% finished building worth?

A lot less than one that is 100% finished, completed to its HABU (highest and best use) and animated all the way to the gunwales (with finishing touches unique to you, differentiating you and bringing you higher revenues).

Make any sense?

Last thing, it isn’t just in real estate that folks aren’t finishing much to their own dis-benefit. For the longest time, the last mile of service was a totally neglected area, that is, until Uber, Lyft, Skip the Dishes, Uber Eats, Amazon, FedEx and others turned their attention to it and made fortunes for their ownership.

Think about DELL-HELL–how many poor DELL customers couldn’t get the company to fix their problems because, after DELL completed a sale via their website, they never, ever wanted to hear from you again because, basically, they had no idea how to cope with their last mile (of service) problem.  

FOR REAL ESTATE INVESTMENT AND BUSINESS COACHING THAT’LL HELP YOU PROVIDE FOR YOURSELF AND YOUR FAMILY FOR 3-GENERATIONS, PLEASE CONTACT:

Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD Real Estate Investment and Business coach Century 21 Explorer Realty Inc broker Ottawa Senators founder 1-613-762-8884 [email protected] twitter.com/ProfBruce profbruce.tumblr.com/archive brucemfirestone.com

•    MAKING IMPOSSIBLE POSSIBLE •    FREEDOM VIA REAL ESTATE INVESTMENT AND PB4L, PERSONAL BUSINESS FOR LIFE •    FEHAJ, FOR EVERY HOME A JOB •    MAKE YOUR HOME WORK FOR YOU, INSTEAD OF YOU WORKING FOR IT •    HIGHER ROI NOT JUST FOR OWNERS AND INVESTORS, BUT FOR TENANTS, GUESTS, VISITORS, NEIGHBORHOODS, COMMUNITIES, TOWNS, VILLAGES, CITIES AND THE ENVIRONMENT TOO

Best Practices - Substantial Completion - What Does it Mean and Why You Should Care. Substantial completion is the single most important date of any project. 

In previous posts we discussed various strategies for organizing and managing the construction process.  Among those strategies, the concept of establishing milestones and breaking up the project into phases of work has been addressed.

There is one very important milestone that applies to all projects.  This milestone is the most pivotal moment in the construction phase and impacts the entire…

I know the legal issues surrounding a building project can be daunting the first time you go through it, even for small projects.  Hiring licensed professionals goes a long way toward protecting you, and you can rely upon them to handle most of the details.  But some things are too important for you to leave to others.  One of the most important legal issues an owner should understand is the difference between Substantial Completion and Final Completion.

A building project is Substantially Complete when the area that was being worked on can be occupied by the owner for its intended use.  This is the most important milestone on your project because it is when legal responsibility for the building passes from the General Contractor to the Owner.

That doesn't necessarily mean it is complete.  There are usually a number of small items to be fixed, like smudges on the wall, a stray drop of paint on the floor, or a ceiling tile that's cracked. 

When the General Contractor believes they have reached Substantial Completion, he will request a Substantial Completion Inspection.  At that point, the General Contractor should submit a document to the Architect and owner, listing all the little fixes they know they need to make between now and Final Completion.  This is commonly called the Punchlist.

First, the Architect will verify that the building officials have signed off on all the necessary inspections.  Then the owner, the Architect, and the General Contractor should inspect the building together.  They will check every room for these things:

Does the Work match what is on the Architect's drawings and specifications (also called the Contract Documents)?

Is the workmanship acceptable and does it function properly?

A good architect will have a checklist prepared that will guide you through every item from floor to ceiling, so nothing gets left out.

As you go through the inspection, you will sometimes find small repair items that the General Contractor forgot to put on his list, or didn't notice.  You add these items to the punchlist.  At the end of the inspection, the parties agree on an estimate of how much money the items on the punchlist will cost to complete.  If the parties agree that the project has reached Substantial Completion, the Architect issues a Certificate of Substantial Completion.  At this point, the owner typically pays the General Contractor all money owed to him, except the amount required to complete the punchlist items.  

This depends, of course, on the contract language.  Some contracts retain some additional funds until Final Completion.  This should be openly discussed at the beginning of the project, and clearly addressed in the contract between the owner and General Contractor.

In addition to payment, the date of Substantial Completion marks these important legal milestones:

The jobsite is no longer under the General Contractor's protection, which means his insurance will not cover any incidents.  Instead, the building now belongs to the owner. 

Warranties and legal statutes of limitation for the work begin

After the Architect issues the Certificate of Substantial Completion, the owner can move into the space, and the General Contractor will complete all the items on the punchlist.  

Many people don't know that you can actually issue partial Substantial Completion.  If there is a particular room that cannot be completed due to some special delay, but which does not prevent you from using the rest of the space, your Architect can issue a Certificate of Partial Substantial Completion that omits specific areas.  Once that omitted area does reach Substantial Completion, a new certificate will be issued just for that area.

Once all the items on the punchlist are complete, the General Contractor will request a Final Completion Inspection.

The Architect and owner inspect the space once more to verify the punchlist items have been completed. 

In addition to checking that the punchlist items are complete, before issuing final payment you and your architect should check for the following:

An affidavit from the General Contractor that all the sub-contractors have been paid.  This is very important because if a sub-contractor has not been paid, they can file a Mechanic's Lien against your property even if you didn't know they weren't paid.

Certificate of evidence for any special insurance you required to remain in effect for some period after project completion.  (This is not typical for most projects.)

Record drawings, if required by your contract.

Certificates of warranty for equipment that was installed, like appliances and emergency generators, as well as other installations like roof membranes.